Welcome to our webinar today we’re going to be doing early bird tax conference but we’ll be talking primarily today about Year End Procedures. I want to call your attention to a couple of links here and you see the third line down alsbom.org/ccs That stands for Church Compensation Services. And we have posted these notes for you there alsbom.org/ccs and you would click on administrator resources, that’s where you would find it. And so you’ll have these notes to look at later or to follow along with today or whatever is helpful to you. And you can find that. If you have any questions or anything just give me a call at any time. And as you see, my numbers are here, 334-613-2241 If you get an answer machine I’ll call you back just as soon as I possibly can. As you know, I’m semi retired. And so I’ll get to you just as quick as I possibly can. Don’t see any questions yet by the time we get through with today I guarantee you you’ll have a bunch of questions but we’re glad, we’re glad that you’re here. Just want to start talking a little bit before 10 and I have that It is 10:01 And so we’re going to get started right now. Let’s begin with a word of prayer.
Father thank you so much for today. Thank you that we can be together. Thank you for all of our blessings that we have. Thank you so much for this season of the year that we’re reminded of the coming of the Lord. And we’re so grateful for the greatest gift that’s ever been given. And father also, this sees it as this time that is very busy for us in the financial part of church life. And so I pray for each one that participates today that you’d be with them and bless them help them as they prepare for the new year 2021. And we just pray for your wisdom and God it said all that we do in Jesus name, amen.
Your notes can be found at alsbom.org/ccs And when you go there, click on administrator resources. We also have the 20, 21 financial issues book at that same location as an online resource. And so any way that we can help you let let us know. Some resources I wanted to mention are pinnaclealabama.org and onegreatsunday.org. You can find some of the webinars. We do have a few webinars that have to do with some financial topics there. And so that I hope that’s helpful to you. also keep following us on Facebook. And when you look at alsbom.org click on the type things where you’ll be getting emails.
If you are registered at ACS as your treasurer or a minister or different positions in the church, you’ll see these kinds of announcements about what’s coming up. All right, so as we think about right now we need to think about our procedures. And so, first of all monthly procedures to review our paid invoices and some of you are monthly payroll tax to pastors. And so you’ve got to get that done reconcile the bank statements and get ready for the end of the year. And so print out your financial statements and review them for any errors that you might be able to find before it’s too late. So your quarterly procedures, you’ve got your 941 and your A-1, which has to do with your tax reporting for the federal government and for Alabama and then other employers would have unemployment forms but churches are exempt from from unemployment taxes.
And fall is a time that’s good to review your internal control procedures basic accounting procedures and your financial report formats and your chart of accounts. And so review your accounting type procedure. Most churches are on a cash basis. It’s easy, it’s simple. Your congregation understands that it’s just an in and out. It’s, here’s the money we’re saved. Here’s the money that went out and why it went out for what purpose. And so that’s really easy, more complicated but also more useful in many ways is accrual method. And that is the, the method where you’re you’re looking at payables and you’re looking at, you know we’ve got a thousand dollars in the bank but we’ve got $3,000 worth of payables.
Well, that’s, you know, we need to look at that and we need to know that so that we can prepare for how we’re going to get those bills paid. It’s also the kind of basis in which accountants and if you have a CPA that you work with, that they do, and and the kind of thing that they would ask you to do if you were to work with one. Take a look at your chart of accounts and look at your income lines and your expense lines and your things that are off budget lines for special offerings and pass through expenses. It’s a good time to look at your reports and my thinking on this and this is just my thought is that you usually should have no more than two pages. Keep it simple, keep it real easy for the congregation to understand. And then for the finance committee you would have any kind of reporting that they want and information that they need. This year and now we’re going to got to get into the new stuff.
This year, there are three new forms and there’s a W-4. It’s a new form this year it’s changed. Now it’s actually changed last year. And most people just use the 2019 form and they were allowed to do that. But now we need to use the new W-4. The new form works with standard deduction which has been doubled. It works with child credit and the lack of deductions for most Americans. These days, it’s estimated that 95% of all Americans will not be able to itemize. And the simple reason is, is that the they can’t exceed the standard deduction which has been doubled. So we’ll be talking specifically about the W-4 because there is a way in which your employees can get messed up. If they do this form wrong. The 941 there’s added lines for the fair, the, the family medical leave act. There’s a new family medical leave act for 2020.
And it is in response to COVID and what the family medical leave act of 2020 does is it requires you to pay your employees if they have to be away because they got the COVID because they have a family member they’re required to keep and that family member got COVID and that sort of thing. There’s some other reasons you can read the instructions for it to find out the other details. This is the first time that the family medical leave act has required that you pay the employee while they’re away. And we, as churches are supposed to do it it’s any company any employer that’s less than 50 employees, well less than 500 employees. And it includes those that are less than 50 employees which most of those things under the family medical leave act do not include businesses that are less than 50. So this is different. However, it is temporary. It’s supposed to be for the year 2020.
We could see that extended into 2021 because of the length of time that it’s taken for us to get rid of COVID, but we’ll just wait and see. There’s nothing known about that yet at this time. It also 941 has to do with credits for keeping employees on the job. And some things that were done in 2020 as a part of the cares act. And if you didn’t do any of those kinds of things then your 941 is going to be just like, it always was. You’ll just be skipping some lines instead of filling those lines out. But you do need to be aware of that and do it properly as your 941. The next new form that we have is called a 1099 NEC that NEC stands for Non Employee Compensation, Non Employee Compensation. This is the 1099 that we will use in 99.9999% of our church situations do not use a 1099 Miscellaneous.
On the 1099 Miscellaneous the line for non-employee compensation is no longer there. And so if you use a 1099 miscellaneous this year you would say, I don’t know her to put the money. And so I’m going to put it in, in other income and that would be incorrect. That would be wrong. So you want to use the 1099 NEC it’s not a difficult form but it is different and you must use it for our church type situations. The 1099 NEC. Here’s a sample of the 941 and I’ve just taken a portion of that 941 And I wanted to point out the church differences. So this church, this particular church had two employees. And as far as taxable income the pastor had $2,000 per quarter. He had a large portion of his pay in housing allowance. And so you would put that you have two employees the church secretary had a income of 2750 for the quarter. And so you would include the minister’s taxable income there.
You, not his housing allowance but the taxable portion of his income. And then on line five do not include the minister. Now a lot in three, let me not skip that line. On line three, you would include the minister if you withheld federal income tax but if he’s doing his own taxes then you would not include any kind of amount there. So then under line five, you would use the, the say the secretary, for example, but not the minister because the minister does not participate in FICA. You cannot you cannot withhold and match FICA on an ordained minister. And so that’s the way that that would work. And this is what’s different about a 941 and than other employers all right. Okay, this is the new NEC form 1099 NEC. And you’ll notice that it’s just like most RS form with the payer’s name and information and the recipient’s name and information.
And you’ll notice that it right there in box one and I’ve highlighted in yellow is where you put non-employee compensation non-employee compensation. So be sure and use the form 1099 NEC not the 1099 Miscellaneous. All right so, under so, this is based on an article by Richard Hammar and he outlined 10 things that are important for us to think about as we look to the new year. So, number one, this is the time if you haven’t already done it for a new housing allowance to be approved in rotting before the first payment in 2021. And your wording may state for 2021 and all future years until changed by official church action. And the house allows could be changed at any time, but not retroactively.
It has to be from this point forward you cannot do it retroactively. So now’s the time for new housing requests. And for those to be approved by the church now. Many of your churches your church votes the housing allowance as a resolution or it may vote on the house allowance because it’s written in the budget and that could be done in some of your churches. You have your finance committee to approve the housing allowance for your ministers. So either way, as long as it’s done by official church action at as long as it’s done in writing. So there’s a two point thing to do. The minister asks for a housing allowance and the amount the church approves that amount.
The court case about the housing allowance has been resolved by the seventh circuit court of appeals from the constitutional reality of the housing allowance. So we’re in, in good shape on that. So the procedure is the minister presents a request for housing allowance and the minister can find a form that he could use if he’d like to under guidestone.org/compensationplanning. And it said that compensation planning guide that’s the one that we use at the state board of missions. And then second, the church officially approves the request in writing. And then it’s up to the minister to be ready to to prove the amount at tax time. Now you do need to do this each year. You should do this each year. I know that some ministers house allowance does not change very often and they request that it is in effect for this and all future years until change. Now, here at the state board of missions we have a very simple procedure and it works really well it’s very effective.
And we fill out these forums every year we fill out a W-4 and in 84 we felt we as ministers fill out a housing allowance form and the kinds of things we fill out a salary reduction form. If we want to have money going to enter our retirement. And it’s very simple. If you don’t fill out the forms, you don’t get paid. So, so it makes it very we have a hundred percent compliance I think, I don’t know if we have it yet but we will before the next few days are over that we will have everybody fill out the necessary forms. So now I want to talk about the W-4 form. And this one is very important. W-4 is about federal withholding and for your non ministers, you have to withhold federal income tax social security taxes, and under FICA. And you have to withhold state income tax if they have enough income to call for withholding.
So the W-4 form is the federal income tax withholding form. And you need for the, your workers to fill out a new W-4 or a for forums. And, you know, W-4 forms can become obsolete because of changes in the employee circumstances their pay increases, their family changes. They didn’t have children. Now they have children, things like that. So now for the minister with holding is optional. They may do their own quarterly tax reporting or they may ask you to withhold federal income tax. Now they can ask you to withhold federal income tax and state income tax. They cannot ask you to withhold social security taxes.
However, they can ask you to withhold extra federal income. The IRS recommends that without a W-4, the employees withholding should be set to be single. And they may want to use the IRS, withholding calculator tool if they wish. Now, here’s what’s different about the new W-4 form. And you see the link to the instructions and on the form. For most people this is really simple. There’s just three considerations. You’re falling status, married or falling married or jointly are falling separately or head of household or single. You have the standard deduction, the child tax credits. It’s simple for the employee. In fact, the employee could just complete step one and sign it in step five and they’re done. The rest of the form is optional but the forum can be very important. So step one is personal information and following status. Step two is extremely important. It’s about multiple jobs. Now this could be multiple jobs in the home. It could be the employee working two jobs. It could be that the employee is married and both are working and they’re filing married, filing jointly, for example.
And so if there are multiple jobs the employee can just simply check that box under step two. There’s a little box to check to say that you you do have multiple jobs. And it works when you when there are two jobs, the employee’s working two jobs are both husband and wife are employed either. If you’ve got multiple jobs, three jobs, four jobs it’s not going to work properly. So anyway, what it does is it is it claims half of the standard deduction for each spouse and both are instructed to check that box. And that’s the easiest answer. So what happens is the standard deduction for a married couple these days is now $25,100. If you check the box, then the form is going to assume that you are checking the box and your spouse is checking the box. And it’s going to claim the $12,500 half of the married filing jointly. If the employee fails to check that, that box then the IRS is going to assume and the way that they do tables and things like that they’re going to assume that you’re claiming the full $25,000 standard deduction.
And if you do that, and if your spouse does that you’re going to have way too little way, way, way too little income tax withheld. So, so I’ve highlighted getting this wrong will cause a tremendous underpayment of tax and your employee will be in a lot of trouble. So make sure, make sure that if they husband and wife both work, that they are checking each checking that box, just, just ask them, especially if you know them well. Hey, I know both of y’all are working are y’all both going to check that box and, and and do that. If, if they’ve indicated marrying, married, filing jointly. Now, if they put single on their form and you know they’re married and, and that sort of thing and they didn’t report as married, filing jointly then they’re going to be okay if they check if they check filing status as single then it would be the 12,000 that would be assumed as standard deduction rather than the 25,000.
Step three is about child tax credits. And if they wish to now, if they want more withheld they could just ignore the child tax credits even though they have children. But if they want to claim their child is going to claim a $2,000 credit for each child under the age of 17. And that’s in step three. Step four is adjustments for extra deductions or for extra withholding. And so they could put an extra amount. They want an additional $50 per pay period withheld out of their check. And then step five is they sign it and they date it. Be sure that your employees as best you can be sure that they are doing this correctly. If they file married, filing jointly. And they’ve indicated that on their W-4 form then let your ears kind of perk up just a little bit especially if you know that both husband and wife both are working.
All right so it’s very important that we do it, right. It’s really not a very difficult form. If you want to go farther, then it gets difficult. If, if the employee wants to tune fine tune that withholding, then there are worksheets to do for the employee to do and and figure out their withholding. But if you just do the basics, it’s pretty simple. So December is a good time of the year to complete salary reduction in agreements for retirement. But now Guidestone calls them Guidestone contribution agreements. That sounds better than reducing my salary for the church retirement planning. And but many of us still call them salary reduction agreements. They, they can be changed at any time. Sometimes I have a question and there are a few things that once you set up in December you cannot change during that next year but these can be changed at any time. And they are kept at the church.
They’re not sent to Godstone is pretty simple but you do want to give them an opportunity to put more into their retirement. Most of us as Americans are behind on our retirement and we need to put more into our retirement. If you have at your church if you have flexible spending accounts, there’s all those there’s only one time per year to make an election. And that election may not be changed unless there exists certain kinds of family changes, marriage, birth, death, et cetera. Now, there is a change for 2020 in which the government allowed employers. Now this is up to the employer if they want to allow this but they allowed employers to allow the employees to change that due to COVID due to COVID. That one of the things that you can do with the flexible spending account has to do with daycare and many children who are not going to daycare. And so the government allowed the change during 2020 but only for 2020.
All right so, number three, and this is Hammar’s list. And so we started with housing allowance and now we’re up to number three. If you give Christmas bonuses, gifts, or bonuses these are taxable income and not a tax-free gift and must be reported as income on the W-2. When any money goes from employer to employee, it is taxable. And there’s only one exception to that. You might be thinking, well benevolence would be an exception and it’s not an exception. The only exception from money going from employer to employee is if there is a major disaster and that major disaster, you help people in your community and you help us staff person in the same way that you help other people in the same community. Otherwise money flowing from employer to employee is taxable money.
Is so is there anything the church can give as tax-free? And it can be a tangible gift and it can be a tangible gift of property having a value so small. As to make accounting for it unreasonable. And so they’re called de minimis fringe benefits and the exception does not apply to cash or cash equivalents cash equivalents would be things like gift cards, gift certificates. So what can we give? That would be tax-free. And so the IRS gives some examples. And this is in publication, 15 B I think it is So coax coffee occasional donuts in the office. Of course were not in the office as much right now, occasional use of the church coffee machine for personal use a staff meal to celebrate birthdays anniversaries, things like the accomplishments a mail to keep an employee on the job for overtime purposes a ham or Turkey, holiday time.
Occasional entertainment of event tickets. And folks those are exactly the way they are as says it. Now, you know, it, it just makes me wonder. I think that they’re a mouth that they have in mind might be limited to a tangible gift not worth more than 50, $75. Some people think that number or some people think a little bit less things like that. But, but they don’t give specific examples you know. So an entertainment event, well I think they’re thinking about the local community theater or a movie ticket that, you know, might be 10, 15, $20. What about Broadway you know. So, so they don’t give you a really firm answer what they mean by all these things. But I think that’s what they’re talking about. One that you might not have noticed in the past is that that’s how they account for the cell phone. Cell phone used to be something that you had to account for every minute, but that’s not true anymore. It’s just that you have the agreement that the cell phone is used primarily for business purposes.
Now it’s primarily for business but I could use it for, for personal. I could play games on the phone. I can do other kinds of it could do some web surfing. But that’s what we can give without it triggering any kind of of tax consequence to, to our employees. So non-cash gifts to employees. If you’ve given your employees something bigger than that it might not be considered de minimis. A ridiculous example although it’s, it’s happened before you give your employee a car a new car brand new car, and that would be a taxable gift. And so if you’re in doubt, I think somewhere around $50 is it is a safe, safe, tangible gift. If you want to go more than that you might want to talk to a CPA and see what they think. So if you did give a gift that’s bigger then you would talk to your CPA or accounting software about putting that on the W-2. And, and the church has 941.
Alright, we need to report taxable fringe benefits on the W-2 and common examples that we would have as Baptist churches, a non-accountable car loans. If it’s not, if you giving your employee money for car allowance and you’re not dealing with reports where they showed the date, place, purpose and number of miles. Then it is a not accountable car allowance. And then therefore it is taxable money. Non-compliant healthcare payments, such as one of the Christian sharing ministries plans. That’s not truly insurance. And so payment of that would be taxable, not having a either a group plan or a group of one or it’s not Guidestone then you need to look at is this pavement taxable. And you may have this year, you may have a reimbursement a health reimbursement, but there are certain rules about that health reimbursement that you must be in order for it to be tax-free.
Moving expense, paid by the church for a move during 2020, that is not tax-free anymore. And so whatever you paid them for their move you’ve got to put that and add that to the W-2. Did you forgive any interest or principal on a loan to your pastor during this year? Just use pastors as an example, did you allow children of the employees to attend your summer camp without charge. Did you provide employees with free memberships to the local gym for example, the value of those kinds of benefits need to be reported on the W-2. Now we think not just about employees but what about volunteers can we give them a gift and we should not give cash gifts or cash equivalent gifts, like a gift card to volunteers because mud, monetary gifts given to employer into volunteers of any amount once you give people money, they’re no longer volunteers.
They are employees. Once you compensate them, then you get into all kinds of other issues, such as minimum wage and workers comp and all those kinds of things that you might need to think about. So for your volunteers just give them a tangible gift of low value. And that’s the way that that needs to be. Keep them volunteers. Number four, we need to provide a notice to donors. They should be advised saying that well church bulletin or newsletter or online newsletter, however, you’re doing it. Not to file their federal income tax return until after they received their contribution statement from the church. This is very, very important. If, if a person files their taxes now this is unusual and unusual rule, but if they filed their taxes, say for example, January 25th and you don’t get their statement out until February 1st and the IRS audits them their contributions could be denied.
Could be denied just simply for the fact their contribution statement might be correct. Everything might’ve been done absolutely correctly but their contributions could be denied because they did not have their statement in hand. It’s good to provide a charitable giving education insert in the bulletin and church law today has an excellent one. Some of those things can include recommended ways that the person can give to the church. And other kinds of information. Now about contributions that has to be physically received but by the church by 1231 by 1231, and of course 1231 is going to be on a Friday. Just like Christmas is on Friday. Do your style be on a new year’s Eve, we’ll be on a Friday. So they can’t bring it to the church on, on Sunday the January 2nd and say, Hey, but this place but this all my 2020 contributions, they can’t do that. It’s got to be physically received by the church or it has to be postmarked by 1231. And if they want to give you a check dated 12 day to December, but they want you to hold on to it.
Please don’t deposit it until January. That is a 2021 gift. Now the debit card and credit card and things like that. Those are deductible in the year the donor makes the charge. And not occasionally say they’ve made the charge on 12:30 and it didn’t hit your bank until January 2nd. It was still be a December. It’d be a 2020 contribution. The key there is that they made the charge in the year 2020. So you’ll want to review financial issues about substantiation and church policies about designated gifts. This is about the church education bolted insert that Richard Hammar has gives those rules, those IRS rules. It might suggest, although it doesn’t always it might suggest giving ideas such as stocks and bonds and then one giving ideas that charitable IRA distribution for those over 70 and a half. We’ll talk just a minute about that in a minute. So there are giving ideas such as including the church in your state planning. That’s not just for the rich and information about the church’s policies about designated contributions. There is a great new way to give to your church. And it’s for people over 70 and a half who have an IRA.
And actually it’s not new. It’s been in effect about 10 years, but now it is permanent and it’s advantageous even for the middle-class taxpayers. So here’s the deal. Most people will not be able to itemize their deductions on federal income tax. Those deductions are still there but the standard deduction is double. What it used to be. The new standard deduction, a married couple is now $25,100. Most married couples won’t have that much in itemized deductions. So in 2017, it was studied that 70% of Americans did not have enough to itemize. Now with the double deduction, it’s estimated about 95% of Americans cannot meet that doubled deduction in order to itemize. So the IRS calls this, a qualified charitable distribution. The rules are you have to be 70 and a half or older and you give directly from your IRA.
Notice that the wording is distribution comes direct from your IRA and you can use it to satisfy your required minimum distribution. So there are significant advantages to it. So let’s say that I can’t give enough and have enough itemized deductions to meet that threshold of $25,100 for a married couple. Well then really my giving tax wise does not do me any good. However, if I’m older than 70 and a half that I can send money directly from IRA to the church. And so it becomes a tax advantaged way to give to my church if I’m that age and have an IRA. The tax advantage is not that it’s tax deductible. It’s not, it is that the donor never received it as taxable income so it’s not taxable income. This will work out the exact same way as being able to deduct it. Actually, it will work out a little bit better because if you’re still working, you, you would only have federal income tax normally on receiving an IRA. And normally under working income, you would have social security taxes, but this way, just going from your IRA, it, you don’t pay any taxes on that money at all. Okay so a new way to give to your church called a qualified charitable distribution. And that is advantageous even for the middle class they might want to look at it.
And I find that churches are receiving more of those than they used to. Now for the church treasure. If the church receives a qualified charitable distribution the check will come directly from the IRA provider. Hopefully the paperwork will explain that it’s a qualified charitable distribution. I say, hopefully because we found that there are a few providers who just sent a check and didn’t really explain what it was or who it was from but hopefully it does explain who it is and, and, and that it is a qualified charitable distribution. You should not include this on a as a tax deductible contribution on their giving statement now, there are some, like, for example, ACS I think ACS, perhaps shall be They might be able to list a contribution on the statement and indicate that it is not tax deductible but you’ll have to see about that about your software provider. But another method would be to acknowledge it. And the IRS does want you to acknowledge it with a letter on church letterhead. Thank you and this example, thank you for your donation of $10,000. Given to first Baptist church on January 25th this was a qualified charitable distribution direct from your IRA. So it will not be reported on your contribution statement no goods or services were given in exchange for your contribution.
The IRA does want an acknowledgement from the church in some way, it could be maybe your software does it and indicates it’s non not texted that to them. The person could receive a letter sort of like this one that I have outlined here. And the main wording that they want the RS wants is that no goods or services were given in exchange for your contribution. That wording is very important as it is on all giving. Frank Somerville suggest to be careful about certain kinds of end of the year non-cash donations. You need to be wary of that. And, and in that we only have a little over two weeks or close to three weeks left in the year. What if somebody gives you something and you know you’re a little uncertain about it. One example would be an antique car. What is it worth that has to be that antique car is likely to have to be appraised. And a lot of other things steps that you must go through and your donor might be putting a little pressure on you to get this done. Or a gift of real estate could be complicated. Some, some gifts might be hard to sell.
With land there could be unresolvable zoning issues or issues With toxic soil, with a building there could be structural issues or problem with lead or asbestos. You don’t want to be rushed into a decision said Frank Somerville. And so you think about that now, publicly traded stock is easy to address and dispose of and get the money for it that one’s easy, but just be aware of somebody wanting to give you property At the end of the year. And, and it could have some issues with it. Number six, think business expenses. If you have an accountable reimbursement arrangement do not give the employees the rest of the money that’s in your budget for that. It’s not their money, it’s the church’s money. And if you give them the balance of what’s in that account you just made the entire amount taxable. These days, employees can no longer write off employee business expenses that were un-reimbursed by their employer.
Nobody that’s an employee can do that. Ministers are employees. And so they they’ll, they won’t have any choice if you give them the money and there was no accountability for that money or you gave them the difference at the end of the year then that’s going to be taxable and there and they can’t run it off. If you don’t have an accountable reimbursement for business expenses now is the perfect time to begin one. All right, number seven this is a good time for reclassification of workers. So think about that if you should reclassify any of your workers for tax reporting purposes. So a minister serving a church should receive a W-2 a minister serving a church should not receive a 1099. You may, there are some churches who have many of their employees classified as 1099 workers. And many of those employees that might not be a proper kind of classification. So there is a program RS voluntary worker classification program. You can use file form 8952 at least 60 days prior to when you want to reclassify them.
And there is a tax to pay but it’s not as large as, as what you would normally pay. And then begin trading the worker as an employee at the beginning of a quarter. So that’s a very good way to do it. You do not want your employee to, in a way report you. Now, they might not realize that they’re reporting you but let’s say, let me give you this example an employee goes to their accountant at tax time and let’s say that it is the church pianist and the church pianist was receiving a 1099. And the accountant says, Hey, it’s church pianist. You’re really supposed to be an employee. I think I can save you some money. And so the cat was say to that person or right now you’re paying all of your social security Medicare taxes, and I can save you some money on that. I’ll fill out a form for the IRS. They will confirm what I’m saying. And then when that happens the IRS will basically have the church pay it.
Well, the church could be forced to go back three years and pay three years of back taxes. The, the social security and Medicare taxes for the last three years. And they would have to pay both sides of it and there could be penalties. So it’s very, very important that you classify workers appropriately. If, if they’re an employee classified them as an employee if they are truly a contract worker, then fine but just be careful about the things that you do here. Another issue that we may have is exempted, non exempt employees. In most churches, the ministers are exempt. Everybody else, usually in a church is non-exempt. Now there are some common exceptions. I’ll talk about a couple of those in a minute. So check the classification of workers. And so a minister, let me say this, a minister is exempt even if they’re not ordained. But the key there is job description. Are they serving in a ministerial job description? And so ministers are exempt. Even if they’re not paid the new requirement is $694 per week to be exempt.
So let’s say that I am the church secretary and I’m paid a thousand dollars a week which is more than the $694 per week. I’m not exempt. I’m still non-exempt because I don’t have the proper of job description for being exempt. But, but to, if I do have a job description to be exempt I still have to be paid $684 per week in order to remain exempt. So most workers other than ministers are non-exempt. And so see if any exempt employees become non-exempt due to the new rule. So for example, let’s say that I am the daycare director and previously I made $30,000 per year. I’m just making this example up. So used to, until this past year used to I would be an exempt employee because I made $30,000 per year and I supervised other employees. And so I had a job that was exempt. And so I have to do both now have to have the job description to be exempt and I have to make 35,005, 68 or more. And if, say, for example, I was a daycare director.
I made $30,000 per year and I don’t make enough to be exempt. And I might switch from being exempt to being non-exempt. And what that would mean is it would mean that that I would have to be paid overtime for any hours over 40 and I’d have to follow the other rules having to do with the fair labor standards act. So, but ministers are exempt. Even if they make, say, for example a Bible occasional administered makes $15,000 per year. All right, so let’s stop right there. And there’s at least at least one question payroll. And this comes from Kim. Can an ordained minister have taxes taken out of regular pay and then no taxes taken from his housing lounge. I’m wondering how to set that up in ACS. ACS can do it now. I’ve not used ACS in about 18 years, but it can do it. You here’s what would happen. You may take out more in federal tax withholding. It’s just a matter of taking out additional amount. Let’s say for example, that a married minister makes 40,000 and out of that 40,000, he asked for $15,000 as housing allowance, just to example, well what the standard deduction for a married couple he wouldn’t have any federal tax of but he would owe about 15% of $40,000 both salary and housing.
And so about 15% of $40,000 would be approximately 6,000. They do give you a break on a portion of it, but about $6,000. And you could not do that as FICA but you could do that as extra federal withholding. And you may set it up that way as extra federal withholding. Now at my mind and you he would not, the minister would not want you to take out taxes on salary, but not take out taxes on housing the extra taxes regarding the social security tax for housing allowance. I would rather that you did both based on only federal tax so that I’ll come out fine at the end of the year. If you wholly take out taxes on me for federal income tax and you take out a few hundred dollars or maybe a thousand dollars but I owe $6,000 because of my social security taxes. I’m not going to be real pleased with that.
And a lot of ministers don’t do their quarterly estimated taxes because they didn’t realize that that they were going to have to pay that much. So you may take extra federal tax. ACS should be able to set up a minister with salary and housing under normal circumstances. ACS would not take out extra federal withholding and that minister would have way too little taken out, but but anybody can request extra federal withholding and that we’ll deal with it. Okay, okay. From Carol, did I understand correctly that benevolence is taxable? If so, when is it taxable. Oh, that’s a great question. I’m glad you asked that question. Well, first of all, let me go back to Kim. Kim if that answered your question. Great if, if it didn’t just text me back or email me back and be clear to, to go deeper into it. Okay is benevolence taxable. And the answer is no, except if that benevolent situation has to do with an employee and employee of the church. So you provide $600 worth of assistance to a person in the community, or even just a member of your church and you provide assistance to them and they’re not employed by the church, then it is not taxable. And you do not do a 1099. There’s nothing that you have to do regarding Texas But if you have an employee who receives benevolence that is taxable to that employee, except for the. the thing that I mentioned earlier about a major disaster, and you help that employee in the same way that you help other people in the community that it might not be taxable. So it’s got to be a major disaster. If one tornado hits one employee’s house, that’s not a major disaster it is for them, but it’s not a major disaster. So your help for that one employee would be taxable income. But if we had tornadoes come through the whole state like we did back in 2011 and we’ve got a major disaster and you your church helps that employee in the same way they help other people in the community. Then that would be the one exception that would not be taxable. All right those are great questions great questions so. All right, let’s go back to social security.
A church must determine who is a minister for IRS and social security purposes and many churches incorrectly report ministers as employees for social security taxes. You cannot do that, you can not do that. Ministers incorrectly classified for social security and Medicare jeopardize their ability to receive the tax-free housing allowance. The other thing that I see churches doing incorrectly I mean, it’s already incorrect but there’s double incorrect is they will take out taxes on the minister for their salary only. So they take out federal tax for their salary only. Then they take out and match social security taxes only on their salary. That’s incorrect, but also it’s gonna really mess up that employee, that minister employee because they’re gonna owe so much more they will owe taxes only on the salary federal tax and state tax, but they will owe social security taxes on both salary and housing. And if that pastor is in a parsonage of pastorium the pastor still owes tax the social security taxes on both salary and housing. And in this case, he would pay social security taxes on the value of that home. Even though he did not receive money he received a value that is represented by that being able to live in the home free of any kind of rent payment. So be sure that you’re doing this right. You cannot do FICA on an ordained minister. Voluntary withholding ministers wages are exempt from withholding but maybe voluntarily have federal income tax and state income tax with here by submitting a W-4, never, ever ever withholding match FICA on an ordained minister. So don’t do that, now for other ministers. Let’s talk about them for just a minute. There is a difference between minister, for department of labor purposes and minister for IRS purposes. And it’s very important that we understand that difference. So for department of labor is about job description and what’s on your mind is administrator is that it has to do with, do you have to pay that person minimum wage and some ministers if they’re a part-time minister and they’ve got a huge event or something like that by the time it’s all over they might not make minimum wage for that particular time. So it has to do with minimum wage.
It has to do with overtime pay has to do with them taking the kids to camp and whether they get paid over time or not. So this has to do with the department of labor. And so if a minister is a minister by job description but not ordained, they can be still a minister for department of labor purposes. And you just need to have a ministerial job description and be sure that that’s the way your job description is done. But for RS purposes, they must be ordained or licensed and they must perform ministerial duties including leading worship, including leading the ordinances of baptism Lord’s supper, including being a religious leader and administering the organization. So it’s a more stringent definition for the IRS than it is for the department of labor but for the minister for tax purposes you may withhold federal income tax and state income tax and never do a FICA on an ordained minute minister Alright, can I review payments to any independent contractor? And so you’ll need to think about that. Remember, you’re going to be preparing a form 1099 NEC NEC So you take a look at those payments to independent contractors, hopefully earlier in the year you obtained a form W-9 from that independent contractor. Now, if you pay a contractor year after year you may just hold on to those W-9 and you don’t have to get a new one every year but you do have to have that on file. It’s going to give you their social security number. And that’s very, very important. Sometimes a church or business will have trouble with an independent contractor.
They realize that, Hey, we’ve paid this person $600 or more. We’ve got to give them a 1099 but I don’t have their social security number. And so you try to get with that person and have a hassle trying to get the social security number. And if you have had them do a W-9 then you’re in good shape, you’ve got their social security number. Also, you could say, this is something you could say you could say, I have your check ready. However, I can’t give you your check until you fill out this form W-9 So that will help you as a treasurer or administrator. So be sure that you use the NAC not the 10 and a miscellaneous. And then order other RS tax forms and publications. Now it’s probably getting late to get those ordered, but but you can buy W-2s and W-3s things like that from office supplies store you used to be able to get them from Sam’s. I’m not sure if Sam’s is doing that still or not. Somebody might want to type in and just say, whether, Sam I’m still has it, but an office supply’s for your W-2s and 1099s and things like that. You do need those kinds of forms because you can’t just print it off the internet and fill it out. Now, there is a way to do those forms electronically. And so you’ll look to your software to do that, but but as far as the paper you do need to have the official kind of paper. So order those, those forms. All right, so we’re gonna talk just a little bit about specifically some Year End Procedures but in the meantime, if you’ve got a specific question then you would want to let us know right now if you’ve got a specific question and we’ll be glad to do that. Anything in the Q and A, okay.
There is a, a new question. Kim would the W-9 for the 1099 NEC be used for a CPA. If the CPA it would be, unless the CPA is incorporated. Now for attorneys, you have to do if you’ve paid them $600 or more you got to do a 1099, even if they are incorporated but for other businesses, other than, than attorneys you would do a 1099 only if they’re not if they’re not incorporated. And the W-9 will tell you that. Now, if I’m incorrect about that, or something’s changed please type in and let me know. But I think that’s correct about a, about a CPA. All right. So you’re in procedures. Let’s pick back up here with Year End Procedures. So first do not close out 2020 until you’ve done the following. First make backups in place in a secure location. And those backups should be done on a regular basis but you especially want to do it at the end of the year. Run your general ledger reports review the W-2 information on pages 19 to 21 are the financial issues, but and if not entered into your computer system you can calculate an amount for a group term life insurance. What is taxable, if you’ve given any employee insurance group term life insurance over $50,000. And you would calculate the employee contributions to church retirement plan to be prepared to enter that on box 12 of the W-2. some of the W-2 codes for box 12 that you might need. These are just some common ones that churches might use. C is group term life insurance in excess of $50,000 or $2,000 for dependents.
That creates a, when it’s over $50,000 that creates a taxable amount that goes there. Code letter E is for 403b contributions. That’s employee contributions. There are other code letters other than E for like if you had a 401k, which I don’t know why you would or if you have Roth contributions, there’s another another code there. If you should have that. The code letter E is for 403b which is what the church retirement plan is. Most of our churches have that. And it’s the employee contribution. W is for contributions to a health savings account. BB is the one contributions for a Roth 403b DD is employer provided health insurance but that’s optional for less than 250 employees. And so most people are not going to enter that on the W-2. But, and none of our churches have 250 employees. So most are not gonna do it. Before closing out the year, check your wage reports. And here’s a suggestion print out your 941, your W-2s and your W-3 on plain paper and check the figures. And you can do a good bit of checking and and looking to see if it, if it’s probably probably correct. So for example, the totals on your 941 federal income tax should equal the total on on your W-3. Now that’s federal income tax, the totals of your 941 social security tax and Medicare tax should be double. Those reported on the W-3. Now that they allow for a thing on the 941 for fractions of cents and adjustments for fractions of cents. But basically that should be double that what’s reported on the W-3.
Then you prepare for 2021 update your chart of accounts between your last payroll of 2020 and the first payroll of 2021. You’ll want to update your chart of accounts update your financial software and for withholding tables. And then if, if you’re doing this manually, which a lot of our churches will have two employees, three employees and they’ll do it manually and you’ll want to obtain Circular E, Publication 15-A. After the last payroll of 2020 update your computer for 2021 payroll numbers. All right, this is a very, very important update. Your disability insurance, if you have disability insurance and let’s say it’s with Guidestone, for example you can obtain disability insurance from Guidestone. It is based on income. It’s actually based on two things, it’s based on income and it’s based on the employee’s age. And so you’ll want to update that with Guidestone each year, if you have life insurance that is a multiple of income. Some churches provide life insurance as group term, life insurance and the amount of two times income or even four times income that has to be updated. It’s very, very important because if these numbers are not updated with Guidestone the benefit would be based on the last reported salary. I knew a minister that his church had just simply not updated that for about six or eight years. And so his, he, he did pass away and his benefit was was based on the last number. And so you’ll want to do that. Now, deadlines, Alabama has the A6 and that’s the monthly form. Some of you might not be required to do that. January 31st, the W-2 has to be done has to be issued to the employees. Minister serving in church must receive a W-2. They all exception that would be if the minister receives only housing allowance, no salary, just housing.
Then you could put that on church letterhead for 2020 you received $16,000, 100% of which was housing allowance. So you’ll want to look at that. Your 1099s are also due January 31st and you’ll want to, before you do that, you’ll want to have on file a W-9 to determine the ones that you need to give a 1099 to. Issued to all non corporations you’ve paid for services for $600 or more. Now here’s an example of a minister W-2 and what it should look like. This particular minister was paid $25,000. He asked for $15,000 as housing allowance. And so the difference there is $10,000. He received $8,000 in taxable salary and he chose actually received $10,000 out of that 10,000. He requested to put $2,000 into his retirement plan. And so you’ll see $8,000 in box one, you’ll say about 12 you’ll see code letter E and $2,000. You will see that in box 13, the retirement is checked. And then in box 14, you could leave it blank. Or you could put housing allowance, $15,000. You’ll notice that in state wages that you’ll have the same as you have in box one for state wages. And there’ll be eight, $8,000. They’re not, there were some blanks on here that I didn’t fill out like federal ID number and state ID number and state ID and things like that. But, but this is the, as far as the numbers go this would be an example of a minister’s W-2. Now notice that boxes three, four, five and six are all blank. They’re always blank on an ordained minister who serves the church. Now, there are a few other types of ministers and a few differences than this but this is always true of a minister who serves a church. So that’s what your W-2 should look like. Let me go back. If the minister had federal income tax with withheld then that amount would be reported here in box two. So you could have a amount of money here in box two but three, four, five, and six would always be blind on a minister serving in church. Okay, deadlines, W-2, W-3, 83, 1099. Remember that’s a 1099 NEC 1096 forums.
They’re all due by January 31st. We used to have a lighter date for some forms than January 31st, but they’re all due now, January 31st. Your contribution statements. January 31st is a recommended date by the IRS, but it’s not a legal requirement. So you want to really strive to get your contribution statements out by January 31st. January 31st, your fourth quarter 941 is due. Now, Joe Ellen Johnson taught me something. She was our CPA here at the state board of missions. And she says, do not file this form early. Now she, I mean, wait until Jen, January 31st but don’t do it January 3rd. Don’t do this for on January 3rd. Why to be sure there’s no corrections. This could help avoid having to do a 941-X which is not the easiest that they RS does. And your Alabama A-1 is also due. So here’s the sequence. As soon as you possibly can give out the W-2s to your employees, and maybe maybe by the 15th or 20th of January you can get those forms out to your employees. And you could even give those forms out regular paper to your employees, just in case you have to change. And so days before the end of January and ask if they have anything wrong with their W-2, any corrections, anything wrong. And then when you’re satisfied that everything is correct then file your last 941 before the 31st. So that’s a good advice. I think that Joel’s advice is being heard now because I don’t get that phone call quite as much. I used to get the phone call January 3rd, Hey I have pharma 941, and now I’m found a mistake and that’s just a heartbreaking call because now they’ve got to do a 941 X. January 31st your 1095 is due. If you are an applicable large employer 50 full-time equivalents or more. And we do have a few churches a few that do have 50 employees. January 31st, your W.2 copy a W-3 A-3 you do even if you file electronically.
So you’ve got to do that February 28th the form nine, 10 94, if you aren’t applicable small a large employer. Due dates for the 941s. And here they are for the year April 30th for the first quarter, June 30, July 31st for the second quarter, October 31st for the third quarter and January 31st of 2022 for that final quarter of the year. Now these States are adjusted if they land on a on a weekend or a holiday but that’s your basic basic deadlines. More deadlines May 15th. The form nine 990-T is due. If you are required to do it most churches are not required to do it but this would be if you had unrelated business income tax for just to give you an example, there’s a church in Alabama that has a bookstore that is open to the public. They’re going to have to file a nine 980 T. There’s a church in Alabama that has a coffee shop. That’s open to the public. They’re going to have to file a 990-T unrelated business income tax. There are a future judges who read out their building all the time and their building is mortgaged and they may have to file a 990-T. So there’s a few examples in church. Many churches will not have to file that form but May 15th is the due date and notice down the third bullet. These May 15th days are based on the fiscal year. Being the calendar year.
May 15th if you have a daycare or school, then our preschool then you should fill out the form 5578. This is not a difficult form. It’s a half page form. And you’re certified certifying that you do have a policy of racial non-discrimination and many churches won’t do these. All right, let me check on any other questions. Okay. If the church expenses let’s see church executes a contract with an independent contractor do you also need to complete a form 1099 NEC. Likely so, so if you, if you pay somebody, if you pay somebody then you would be giving them a 1099 if they’re not incorporated. And the form you’ll want to get the form W-9 first in order to determine if you’re going to need to give them a 1099. Yes, yes, I think I was just thinking, what if it was the contractor giving the church a 1099 but I think I’ve got the gist of that question I believe I do. Okay next question. What ministry related expenses, for example, song downloads guitar strings be considered taxable income for the ministers W-2. If It, it would depend on how this is done. I think the best way to do that song downloads guitar strings, musical equipment, music, sheet music, things like that.
I think that would be better done as, as some kind of budget line item in the music ministry. However, if you want to reimburse a minister for those kinds of things, you would just do an accountably and they would turn in a receipt for those things. And then you would reimburse those things. Now I’m assuming that the song downloads, so the guitar strings are for Worship music and that that’s the way they’ll be used in, in that manner. But if you do it right, if you do it as an accountable reimbursement, and they turn in the tickets and get reimbursed, then it would not be taxable, if you just give them money. And there’s no accounting for that money, then it would be taxable, but that would just simply be reimbursement for church business stuff. If you’re a pastor also cuts the church grass, which is considered a contract cutting payments should be with a 1099 or what are added to the W-2. Okay the, this one gets to be kind of complicated sometimes. And here’s the way that Joel and I have talked about this situation. I think that if If any employee has two jobs, you just pay them with one W-2. I think that’s the norm. And I think that’s what you would do If but lets say he is, you know, pastor Smith’s lawn service and he has other customers and he has his own business.
Then you could, but passer special lawn service is not incorporated. Then you would give him a, you could write checks to pasture Spence lawn service, and you would give pastor Smith’s lawn service a 1099, while you would give him a W-2 as being pastored the church. But I think the norm, if he is just simply doing it he’s not a separate business. He does not do long service on the side. He’s just doing it for the church only. Then you would just add it to the W-2. So if you’ve got any other questions about to elaborate on that one and let let me know or type back in, and we’ll be glad to do that. Okay do you have to file a 990-T if you have a thrift store. Wow, that’s a great question. Do you have to file a 990-T if you have a thrift store. It, you might, you might and you’ll need to look at RS publication, 1828 to see if it is unrelated business income, general rules. If your stuff is mostly donated stuff, you probably won’t. If you’re people who serve with the thrift store if they’re mostly volunteers are all volunteers then you would not have to do the 10, the 990-T but start with RS publication 1828. You’ll probably before it’s all over, you’ll probably go to your CPA and and y’all talk through all those rules that are there at 1828, doesn’t have all the rules but it’s got kind of the basic rules and is a great place to start. She’ll probably want to talk through this question with your CPA. Hope that helps speaking.
Okay. The store question is for the association on church. Yeah so a number of our associations are having thrift store And that’s, that’s pretty commonly done. And the way that you operate the thrift store is going to determine that question and the answer to that question. So I hope that that’s helpful to get you started start with RS publication 1828, and then go on to your CPA to get further assistance. Okay. If the church has a building that is rented out to a local business do we need to file a nine 990-T. If your church building has a mortgage and then likely you will have to file a nine 990-T. Now that question brings out a lot of different question. So, what are the other things about renting out to a local business. Is that, is that I wanted to say neuro mint, but private benefit. That’s the, that’s the word I was looking for. Is that private benefit and the the basic of that, just to give it in a nutshell is that people can’t take advantage of the church to make money.
I’ll just summarize it that way. And so if you know, when somebody asks us to use the use the church facility. let’s let’s take an example. Let’s say that somebody selling something And one of the most common things are the different things to sell like makeup or or, you know, or jewelry or the pampered chefs stuff. Or other things like that. And they’ll say, I’d like to use the church for a party. And then they say at this party, we’re gonna be doing a party and it’s going to be about pampered chef. And then what I really want. And they don’t say it that they they really want is they want that to be free the use of the building to be free. And if you give them the use of the building for free that space has a value to it. And the electricity and the lights have has a value to an air conditioning. And so if you give them that for free then you’ve given them private benefit in the use of the church so. This question really has several different parts to it. And again, you can find some basic answers to this question in RS publication, 1828. But so you may have to file a nine 990-T if you’re buildings some mortgage but regardless you’ll want to talk with a CPA about that.
There are some rules and exceptions to rules. So you want to go through all those and and see if you might be able to do that without Without falling. But realize that, Oh, it’s not always the end of the world. Like for example, that coffee shop or that bookstore in the church, and they’re open to the public that just know that that’s part of it and we’re happy to do so. You don’t want to get into a private benefit situation. You also don’t want to get into a local business situation that is not in keeping with the purposes of your church. Okay, sheila says to clarify, separate building on properties owned by the church that is rented to the local business for their exclusive use not related to the church for their exclusive use. That’s probably going to call for a nine 990-T. It I would say probably, but get with a local CPA. And your CPA is probably going to have to do a little digging and research to, to be sure. But one thing that bugs me just a little bit and I don’t know how you’ve been at the term exclusive use that could be a problem with private benefit. It could be a problem with that. Not coinciding with the church use and the purposes of the church. Also, if you look at Iris publication, 1828, you’ll say that It says that our assets, this is about page three says that our assets are used exclusively for our purposes and our purposes are religious and charitable and educational and things like that.
So, so you could be into a more serious problem with the use of your building, but, but get with a CPA, talk it through. And you, you know, with the purpose issue you might need to talk to an attorney, but I hope that that helps you get started in the right direction. Those rules are pretty complicated and you can have one rule that says another one thing. And another rule is an exception to the first rule. And so it gets pretty, pretty complicated. All right, so we want to this is a great time to discard things and use a shredder. So documents pertaining to the IRS that are seven years or older. You might want to shred contribution statements that are older than seven years. Most banking documents older than three years and then contribution envelopes that are 2018 or older or if you prefer three-year schedule 2017 or older. Now let’s talk about the difference between the second bullet and the fourth bullet. Contribution statements. Now, this would be the printout. You need to keep a copy at the church and you would keep those copies for seven years, contribution envelopes. You don’t have to keep it all but they are a good backup system to the contributions.
And if there’s a question about contributions they can be a good backup system. So you can keep them one to three years. You shouldn’t keep it more than three that’s plenty of time. So that’s the difference between contribution statements and contribution envelopes. Now under contribution statements some churches will back those up on your computer. And I would recommend that you use some kind of method that even if your computer changes in seven years you’ll still still be able to read those, like, for example a PDF document. And so you could keep it on your computer. You could, you could put it all from your computer onto some kind of backup system or thumb drive or something like that. And you could certainly do that, but just be careful about how it is stored, have your next, the last bullet have your historical documents like your minutes and things like that. History and historical documents microfilm by the Sanford university library if you’ve not already done so. So this would be a good time to look at doing that now. The actual discarding you might not be able to get it done this month, but but keep in mind that you’ll want to do that. So here’s some resources, church finance today a church law today. That’s about Richard Hammar. I hope you notice that his name, he, in fact I’ve put on the very first page. It is based on an article by Richard Hammar and he ups updates this article every year. He is one of our leading nationwide experts in church and tax. So if you get his resources or books or articles you know that you’ve got a great source.
The evangelical council on financial accountability is a wonderful organization and that’s at ecfa.org. They still put it as NACBA because that’s what many people know by national association of church business administrators. There, they’re now known by church network, but but you can go to nacba.net and it will it will forward you to the right to the right one. The minister’s tax guide by Richard Hammar and the short tax guide. That’s about 60, 70 pages, it’s available for free from Guidestone and from church compensation resources, our office, either one. There is a section it’s mostly about the ministers tax but there’s a section at the back of the book that is about the church taxes. And it’s very similar to what in fact are our book financial issues but is based on a lot that were Richard Hammar and the gray pages in the back of the minister’s tax guide. But any way that I can help you please give me a call at 613-2241. And that’s also posted there. I’m so thankful that, that you have an interest in doing this correctly and doing it well the way that I look at it is I look at it as part of good stewardship that we are to be very very wise in the use of God’s money. And all of that that we want to to consider. But, but I’m thankful for you.
I hope you have a wonderful Christmas wonderful new year and a wonderful January that as we get into some difficult situations, getting all this done, but if there’s ever any way that I can help give me a call I’ll be, if I don’t know the answer I’ll be glad to find and research the answer for you. Let’s pray. Father, thank you so much for today. Thank you for a good day. Thank you for each one that is a servant of you and a servant of your church. I just pray for them for wisdom and guidance. I pray that you would help us all to be good stewards in all that we have. Be with us now and help us to really keep in our mind and in our heart and our soul, the, the, the wonder of this Christmas season the wonder of the Christ child, the wonder that you would give the greatest gift of all in Jesus name amen. Thank you all so much.